Youdao [DAO] Conference call transcript for 2022 q1
2022-05-24 13:38:04
Fiscal: 2022 q1
Operator: Good day, and welcome to the Youdao 2022 First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeffrey Wang, Investor Relations Director for Youdao. Please go ahead.
Jeffrey Wang: Thank you, operator. Please note the discussion today will contain forward-looking statements related to future performance of the company, which are intended to qualify for the safe harbor from liability as established by the U.S. Private Securities Litigation Reform Act, such statements are not guarantees of the future performance and are subject to the certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion. A general discussion of the risk factors that could affect Youdao's business and financial results is included in certain filings of the company with the Securities and Exchange Commission. The company does not undertake any obligation to update forward-looking information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purpose only. For the definition of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2022 first quarter financial results news release issued earlier today. As a remainder, this conference is being recorded. Besides, a webcast replay of this conference call will be available on Youdao's corporate website at ir.youdao.com. Joining us today on the call from Youdao's senior management is Dr. Feng Zhou, our Chief Executive Officer; Mr. Lei Jin, VP of Operations; Mr. Peng Su, our VP of Strategy and Capital Markets; and Mr. Wei Li, our VP of Finance. I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic direction.
Feng Zhou: Thank you, Jeffrey, and thank you all for participating in today's call. Before we begin, I would like to remind everyone that the financial information and non-GAAP financial information mentioned in this release is presented on a continuing operations basis, and all numbers are based on renminbi, unless otherwise specifically stated. We're pleased to report solid performance in the first quarter of 2022 following the cessation of our K-9 academic AST business, with record-high revenues and overall gross margin as well as a significant improvement in operating loss. Q1 net revenue was RMB1.2 billion, up 26.6% year-over-year and 14.5% quarter-over-quarter, a new record high. We also achieved an overall gross margin of 53.5%, another record high. Given the disposal of K-9 academic AST business, Retrospective adjustments to the historical statements of operations have also been made for the previous periods, which provides a consistent basis of comparison for the financial results of the continuing operations. Furthermore, we narrowed the operating loss by 41.6% year-over-year to RMB125.1 million from a loss of RMB214.3 million in Q1 2021. These results amid a challenging macro environment clearly reflects our strengthening fundamentals as well as the effectiveness of our strategy. Liquidity wise, we have adequate funding for long-term growth. First, as of March 31, 2022, Youdao's cash, cash equivalents, restricted cash, time deposits and short-term investments totaled RMB1.2 billion. Secondly, our controlling shareholder NetEase Group has been supporting our long-term growth. Until the date of this release, Youdao has received the various financial support from the NetEase school. Among others, including RMB878 million short-term loans and US$300 million revolving loan facility. In support of Youdao's future business, NetEase Group has agreed to provide financial support for our continuing operations. Now, I'd like to share more details on our first quarter progress. First, let's look at smart learning devices. Our Q1 device revenue was RMB253.2 million, representing an increase of 25.4% year-over-year. This is remarkable growth given the COVID related supply chain and sales channel challenges. In total, we sold 430,000 devices in Q1. As we discussed in past quarters, devices are a key growth area for us. An important priority this year is to drive growth and synergy by scaling up R&D, updating existing product lines and shipping new products. We strictly followed our strategy in Q1. We added new dictionary databases to Youdao Dictionary Pen, while we already have the most comprehensive dictionary database. We added 11 new series of English textbooks to Youdao listening part with the total reaching 19. In terms of new products, more recently, in early April, we launched the Youdao's Smart Light. A product in development for over a year. Yoda Smart Light is a smart desk lamp with integrated AI learning features, powered by our advanced AI algorithms. It automatically analyzes users' hand and body movements while sitting at the desk, allowing the user to seamlessly access a host of AI learning functionalities while they are reading, writing or doing homework. You can point to an English word to look up or tap a sentence to have it read to you or ask it to check your arithmetic worksheet for you. It even tracks the users sitting posture and will alert the user when detecting unhealthy postures. After we launched the Youdao's Smart Light, the initial feedback is very positive. We plan to grow its popularity over the coming months as we did with other products. We are also looking forward to introducing additional smart devices this year as planned. Now let's talk about learning strategies. Our strategy here is to transition from an academic AST center business to STEAM and vocational courses center business at an accelerated pace. Since Q3 last year, Q1 is the third quarter in which our team scaled up our growth products like the Weiqi courses and graduate school entrance exam courses. While at the same time, closing down academic AST courses has been a challenging process, and we have continued to deliver steady progress in Q1. Our new courses are growing quickly, which partially offset loss of revenue from academic AST courses. Net revenue from learning services reached RMB826 million in Q1 2022, up 36.1% year-over-year. If we were to compare with the learning services net revenue, including K-9 academic AST business in Q1 2021, it declined by 17.3% year-over-year. Note that we were positively impacted by seasonality because Q4 was a major renewal season and a large part of gross billings generated in Q4 were recognized as net revenue in Q1. As for STEAM courses, Youdao Chess expanded particularly fast with its gross billings increasing 170% quarter-over-quarter. Besides, we established a strategic partnership with the Haidian Chess Association. In addition to courses, our Go and chess user community has been growing at a fast pace. Here, we have the Youdao Boardgame Academy app, where users can play against others or learn, Go or chess with the help of our proprietary AI technology. Every day about 200,000 go or chess games are played on the Youdao game economy app and our other assets. This approach of combining courses and the community and AI-based app experience, is a major competitive advantage for us. The courses and the app drive each other's growth. In addition, Youdao has become an official online testing and certification site for which economies in Beijing and Anhui province. Throughout -- through the test, users can receive certifications for their skill by the Chinese Weiqi Association or Beijing Weiqi Association. Let's turn to vocational and adult education courses. In Q1, we upgraded our gradual school entrance exam courses hiring to offer a one-stop service for our customers. We also explored online-merge-offline courses to increase the learning efficiency and effectiveness. With ongoing upgrade, the gross billings from the gradual school entrance exam courses grew by over 160% quarter-over-quarter. We also saw growing demand for other vocational courses, such as constructor certification courses and accounting courses with gross billings increasing over 7x year-over-year in Q1. Our other endeavors, including education digitization business, dictionary and translation apps and our charity initiatives are also progressing smoothly in Q1. Looking ahead, we continue to implement our strategy of 4 growth pillars, that is: smart devices; STEAM courses; vocational education; and education digitization. The first 2 devices and STEAM courses are at a larger scale and already a significant part of our business. The latter 2 are making good progress in product development and business model validation. We expect to see challenges, including this new wave of COVID in China. We intend to overcome them through our diversity of businesses, large user bases and deep technical routes for innovation. With that, I will turn the call over to Su Peng to give you more details on our financial performance. Su Peng?
Peng Su: Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights for the first quarter of 2022. We encourage you to read through our press release, issued earlier today, for further details. For the first quarter, total net revenue were RMB1.2 billion or US$189.4 million. This represents an increase of 26.6% from the first quarter of 2021. Looking at this growth by segment. Net revenue from our learning services were RMB826 million or US$130.3 million increased by 36.1% from the same period in 2021. We attribute this growth to the increased revenue generated from our learning services which were further driven by the growth in active users compared with the same period of 2021. Net revenue from our smart devices were RMB253.2 million or US$39.9 million increased by 25.4% from the same period in 2021, driven by the increase in sales volume of Youdao Dictionary Pen in the first quarter of 2022. Net revenue from our online marketing services were RMB121.4 million or US$19.1 million, representing a 12.7% decrease from the same period in 2021. For the fourth quarter, our total gross profit reached RMB641.8 million or US$101.2 million, increased by 29.3% compared with the first quarter of 2021. Gross margin for learning services was 63.9% for the first quarter of 2022 compared with 63.4% for the same period in 2021. Gross margin for smart devices was 33.7% for the first quarter of 2022 compared with 44.1% for the same period in 2021. Gross margin for online marketing services was 23.7% for the first quarter of 2022 compared with 16.4% for the same period in 2021. For the fourth quarter, total operating expense were RMB766.9 million or US$121 million compared with RMB710.8 million for the same period of last year. With that, for the first quarter, our sales and marketing expense were RMB506.4 million compared with RMB548.7 million in the first quarter of 2021. Research and development expense were RMB203 million compared with RMB127.7 million in the first quarter of 2021. Our operating loss margin was 10.4% in the first quarter of 2022 compared with 22.6% for the same period of last year. For the first quarter of 2022, our net loss from our continuing operation attributable to ordinary shareholders was RMB95.4 million or US$15.1 million. compared with RMB219.3 million for the same period of last year. Non-GAAP net loss from continuing operations attributable to ordinary shareholders for the first quarter was RMB70.9 million or US$11.2 million compared with RMB204.8 million for the same period of last year. Basic and diluted net loss per ADS from continuing operations attributable to ordinary shareholders for the first quarter of 2022 was RMB0.77 or US$0.12. Non-GAAP basic and diluted net loss from continuing operations per ADS for the first quarter was RMB0.57 or US$0.09. Our net cash used in continuing operation activity was RMB425.6 million or US$67.1 million for the first quarter. Looking at our balance sheet. As of March 21, 2022, our contract liability, which mainly consists of the deferred revenue generated from our learning services were RMB729.5 million or US$115.1 million compared with RMB1.1 billion as of December 31, 2021. At the end of the period, our cash, cash equivalents, restricted cash, time deposits and short-term investments totaled RMB1.2 billion or US$183 million. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.
Operator: [Operator Instructions] Our first question will come from Elsie Sheng from Morgan Stanley.
Operator: The next question comes from Hongyi Cao with CICC.
Operator: The next question comes from Brian Gong of Citi.
Operator: Next question comes from Linda Huang of Macquarie.
Operator: The next question comes from Thomas Chong of Jefferies.
Operator: The next question comes from Candis Chan of Daiwa.
Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Jeffrey Wang for any closing remarks.
Jeffrey Wang: Thank you once again for joining us today. If you have any further questions, please feel free to contact us as at Youdao directly or reach out to TPG Investor Relations in China or the U.S. Have a great day.
Operator: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
